As we have written about extensively over the past couple years, under the federal Opportunity Zones tax incentive program (the “OZ Program”), taxpayers can defer, reduce, and eliminate capital gains taxes by timely investing capital gains proceeds into a Qualified Opportunity Fund (a “QOF”) and meeting a variety of other requirements. Several of the OZ Program’s requirements include taking certain actions within specified time periods, certain of which were extended last spring as a result of the Covid-19 pandemic and the declared federal disaster. Earlier this year, those time periods were further extended by the IRS as follows:
- 180-day Investment Period. To make an investment under the OZ Program, taxpayers must invest capital gains proceeds into a QOF within 180 days after the gain is realized. Under the further extension granted by the IRS, if this 180-day period would have concluded after April 1, 2020, and before March 31, 2021, then the investment period was extended to March 31, 2021.
- 90% Asset Test. QOFs are required to maintain 90% or more of their assets in Qualified Opportunity Zone Property (“QOZ Property”). This requirement is tested by taking the average of the QOF’s percentages of such assets at the end of the first six months of its taxable year and the last day of its taxable year. Under the further extension, if the last day of the first 6-month period or the last day of the taxable year of the QOF falls between April 1, 2020, and June 30, 2021, then the 90% asset test is, in effect, waived for that period. Testing a QOF’s assets would begin again after June 30, 2021 (December 31, 2021 for QOFs using a calendar tax year).
- Working Capital Safe Harbor. A Qualified Opportunity Zone Business (QOZB) is prohibited from holding more than 5% of its assets in most financial assets, including cash and securities. Financial assets that are held by the QOZB as working capital are excluded from this restriction provided certain requirements are met and the working capital is utilized in accordance with a development or business plan of the QOZB within 31 months, or up to 62 months if additional requirements are met by start-up businesses. Under the further extension, QOZBs holding financial assets as working capital intended to be covered by the safe harbor before June 30, 2021 get an extension of up to 24 months, bringing the total safe harbor period to 55 months, or 86 months for start-ups.
- Substantial Improvement Requirement. For tangible property held by a QOF or QOZB to be considered Qualified Opportunity Zone Business Property, it must pass either the “original use” test (meaning new property that is first used in an Opportunity Zone) or the “substantial improvement” test. Property will pass the substantial improvement test if it is improved over a 30-month period by additional new investments at least equal to the original basis in such property. Under the further extension, the period from April 1, 2020 through March 31, 2021 is disregarded (or tolled) in determining any 30-month substantial improvement period, effectively extending the substantial improvement period by 12 months.
- Reinvestment by a QOF. If a QOF disposes of any of its QOZ Property (or gets a distribution that is treated as a return of capital) and reinvests the proceeds in other QOZ Property within 12 months, then the proceeds of the disposition do not get counted (e., get ignored) when calculating the QOF’s 90% asset test during the 12-month period. Under the further extension, if a QOF’s 12-month reinvestment period includes June 30, 2020, then that QOF receives up to an additional 12 months to reinvest, for a total reinvestment period of up to 24 months.
As always, taxpayers should exercise care in interpreting and taking advantage of these extensions as they apply to any particular situation, and seek advice from a knowledgeable professional if there is any question or uncertainty.
Please see our Client Alerts and Blog Posts on the Opportunity Zones program at www.martinllp.net for further details.